NET ASSETS ACQUIRED

5. NET ASSETS ACQUIRED

5.1 The acquirer must recognize separately at the date of acquisition the acquiree’s identifiable assets, liabilities, and contingent liabilities that satisfy the recognition criteria at that date set out in the IFRS. These net assets must be recognized irrespective of whether they have previously been recognized in the acquiree’s financial statements. The criteria used are

• Assets other than intangible assets must be recognized if it is probable that the future eco- nomic benefits will go to the acquirer and their fair value can be measured reliably. • A liability other than a contingent liability must be recognized if it is probable that there will

be an outflow of resources required to settle the obligation and the fair value can be mea- sured reliably. • A contingent liability or an intangible asset must be recognized if its fair value can be recog- nized reliably.

5.2 Any minority interest is stated at the minority’s proportion of the net fair value of the above items.

5.3 Any agreed restructuring provisions would generally not be recognized unless the acquiree has at the acquisition date an existing liability for restructuring that has been recognized in accor-

dance with IAS 37. Identifiable assets, liabilities, and contingent liabilities must be measured ini- tially at full fair value, which includes any minority interest share of those items. The acquirer should not recognize any liabilities for future losses or other costs expected to be incurred as a re-

Chapter 35 / Business Combinations (IFRS 3)

sult of the acquisition. If the acquiree’s restructuring plan is conditional on it being acquired, then just before the acquisition, the provision does not represent a present obligation, nor is it a contin- gent liability.

5.4 Intangible assets acquired must be recognized as assets separately from goodwill. These in- tangible assets must meet the definition of an asset in that they should be controlled and provide

economic benefits and are (1) Either separable or arise from contractual or other legal rights; and

(2) Their fair value can be measured reliably.

5.5 Thus, such items as trademarks, trade names, customer lists, order or production backlogs, customer contracts, artistic-related intangible assets, and contract-based intangible assets such as li- censing and royalty agreements and lease agreements may meet the definition of an intangible asset

for the purpose of IFRS 3.

5.6 Similarly, in applying the purchase method, all contingent liabilities assumed must be recog- nized if their fair value can be measured reliably. After their initial recognition, the contingent li- abilities must be remeasured at the higher of the amount that will be recognized in accordance with IAS 37 and the amount initially recognized less cumulative amortization (where appropriately rec- ognized in accordance with IAS 18). Any contingent liability recognized under IFRS 3 continues to

be recognized subsequently, even though it may not qualify for recognition under IAS 37.

Case Study 3

Cost of acquisition

less fair value of net assets

less restructuring provision

Goodwill 470

Income statement at year end Profit before amortization

Amortization of goodwill

93 Interest (13) Profit before tax

This information relates to the acquisition of X, a public limited company, by Z, a public limited com- pany. At the date of acquisition, the fair value of the intangible assets and the contingent liabilities of X were $100 million and $30 million respectively. At the date of the preparation of the financial state- ments, the value of the net assets of X had increased significantly. The intangible assets have a life of 10 years.